Understanding Competition in U.S. Prescription Drug Markets: Entry and Supply Chain Dynamics
I am a lawyer working towards a Master of Population Health degree. I have worked in hospitals in patient safety and risk management. I have also worked for insurers managing medical malpractice claims. I am opposed to the Medicare safe harbor provision for health care GPOs and PBMs. A handful of very large GPOs dominate the health care supply chain. The safe harbor allows them to receive a percentage of the revenue on the supplies they sell to hospitals or, in plain English, a kickback. At the same time, GPOs pay hospitals a bonus based on the percentage of purchases they make through their GPO. [GPO industry sources say that a portion of this money even winds up hospital CEOs' pockets.] This percentage is the equivalent of "cash-back rewards" based on purchasing volume. GPOs' influence on hospital decision-making is not limited to "cash back rewards." Hospital-embedded GPO representatives foster close relationships with staff and leadership, participating in a wide variety of hospital committees and initiatives. GPOs are middlemen between hospitals and suppliers; PBMs are middlemen between drug plan sponsors and pharmacies. The safe harbor also legalizes PBMs' ability to obtain kickbacks from drug manufacturers. My view is legalizing PBM rebates has resulted in ever-increasing prices for drugs. Kickbacks lead to over-utilization, increased costs, unfair competition and corrupt decision-making. Suppliers pay kickbacks to GPOs in return for large purchases. This results in wastage; the more waste, the more money suppliers and GPOs make. Kickbacks keep prices high because they create a barrier to entry. Only large suppliers can afford to "pay to play." By awarding sole-source contracts to a few suppliers, GPOs can encourage supplier consolidation leading to greater vulnerability in the supply chain and greater pricing power. The safe harbor contributes to shortages of basic drugs and supplies such as saline solution. The kickbacks are passed onto Medicare, Medicaid, and other payers in the form of higher prices. Ultimately, patients and taxpayers pay the bill. What does this mean for health care? Doctors and nurses arrive at work to find that drugs, devices and supplies they have become accustomed to are no longer available, replaced by others they are not trained to use. Too often the quality is lower. Having to work around shortages of basic medical supplies and generic drugs is now the norm. These shortages and "change-ups" introduce inefficiency, add stress and increase the risk of patient harm in an already complex high stakes environment. GPOs tell us they are highly ethical, acting in the interest of patients, and that their value added is in increased efficiency they pass on to their hospital members. One large publicly-traded GPOs just reported a large increase in net supply chain revenue over last year. Are hospitals reporting big savings in supply costs? No. The history of GPOs does not justify blind trust. GPOs decline to share details about their contracts and "fees" with the public even on an aggregated no-name basis. Why aren't the alleged savings they generate through volume purchasing enough to obtain a fair ROI? It seems those benefiting from the kickbacks don't want clinicians or payers to know the financial incentives influencing their decisions and recommendations. I don't know any front-line physicians or nurses who know the terms of their hospitals' GPO contracts. Even blatant conflicts of interest remain hidden. Kickbacks are usually illegal because economic theory shows they interfere with normal cost and quality considerations. To me, this failed "safe harbor" experiment bears this out. Although repeal of the anti-kickback safe harbor would require congressional action, the FTC and Justice Department are empowered to stop "anticompetitive contracting practices." They must immediately use their authority to put a stop to the secretive anti-competitive machinations of GPOs and PBMs.